Bad Faith Without Breach of Contract? Indiana Supreme Court Says the Duty of Good Faith Includes the Manner of Handling the Claim

Insurance policies contain words that become ambiguous as technology and building practices change, causing good faith disputes over coverage to arise. While a good faith dispute over coverage does not constitute bad faith, one court suggested that an insurance company can be liable for bad faith if it fails to fairly treat its policyholders during its investigation of the claim. The Indiana Supreme Court recently affirmed a jury verdict finding that an insurer acted in bad faith in denying its policyholders' claim, even though the denial was found to be valid. In Monroe Guaranty Insurance Company v. Magwerks Corporation, the Supreme Court of Indiana held, "[a] good faith dispute over coverageā€¦did not preclude finding of bad faith and award of punitive damages based on insurer's conduct leading up to and including the issuance of the denial letter." The insured, Magwerks, brought suit against Monroe Guaranty Insurance Company, a commercial property insurer, to recover for breach of contract and bad faith and sought punitive damages. The trial court granted summary judgment, finding that the roof had collapsed. The case went to trial and the jury found Monroe Guaranty acted in bad faith and was liable for punitive damages. Monroe Guaranty appealed citing Freidline v. Shelby Ins. Co., 774 N.E.2d 37,40 (Ind. 2002). The Indiana Supreme Court stated, [I]f the allegations of bad faith in this case rested solely on a dispute about coverage[,] then Monroe Guaranty would be correct. We reaffirm that a good faith dispute concerning insurance coverage cannot provide the basis for a claim in tort that the insurer breached its duty to deal in good faith with its insured. And "[t]his is so even if it is ultimately determined that the insurer breached its contract. That insurance companies may, in good faith, dispute claims, has long been the rule in Indiana." But an insurer's duty to deal in good faith with its insured encompasses more than a bad faith coverage claim. And Freidline should not be read to suggest otherwise. In that case [Freidline] the only dispute at issue concerned a good faith difference of opinion over whether a claim was or was not covered. As a result we said "[t]o prove bad faith" etc., the plaintiff must establish "that the insurer had knowledge that there was no legitimate basis for denying liability." Freidline, 774 N.E.2d at 40. This was not meant however to suggest that this is the only way to demonstrate bad faith. In this case, Magwerks asserts that the duty to deal in good faith includes also the "manner of handling the claim." Monroe Guar. Ins. Co. v. Magwerks Corp., 829 N.E.2d 968, 975-77 (Ind. 2005). The Indiana Supreme Court upheld the verdict and found bad faith can occur even if there is a good faith dispute over coverage. Further, the Court did not rule out the possibility that policyholders may have a bad faith remedy against insurance companies that mistreat their clients, even if there is a valid basis for denying their claims.

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